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Is the Treasury asking the right questions?

20-Jul-08

Nick Mathiason noted in the Observer today that:

As Alistair Darling mingled with the press at the Treasury’s summer drinks party last Tuesday, officials expressed alarm at steep falls in UK bank share prices, compounding the ever-deepening financial crisis.

When asked whether any reform of the financial system would feature a fundamental review of tax havens and offshore financial centres - the places where the world’s banks parked most of their mortgage-backed securities and structured investment vehicles - officials and ministers replied that it was not a priority.

Why the heck not? Has no one heard of systemic thinking in Parliament Street? Don’t they realise that what’s happening is not a minor systems fault? It’s the system that’s at fault and tax havens play a major part in that system that’s failed?

Look at this (which :



Compare that with the conventional thinking that the Treasury seems to be using:

  1. Listing situation elements and;
  2. Selecting the most likely element to focus on.

If the Treasury are using this thinking technique then of course they’re asking the wrong questions. Their techniques are wrong.

As The Observer notes:

Last month, the Bank for International Settlements, the organisation that watches over the world’s central banks, asked in its annual report: ‘How could a huge shadow banking system emerge without provoking clear statements of official concern?’

Good question. But a better one is why is no one at the Treasury asking it?

Systemic thinking is finding systemic (system-wide) patterns across complex subjects and challenging situations. There are two parts to systemic thinking:
  1. Listing situation elements and;
  2. Finding the common theme across those elements:

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Who is driving any exit from the UK? The professionals, of course

18-Jul-08

The ICAEW and CIOT have called for a review of UK taxation to make our system more attractive to multinationals (see previous blog).

But then consider who are driving multinationals out of the UK. It’s professional firms of course. Take this comment from Brigid Breslin and James Ross of McDermott Will & Emery UK LLP, a firm of London lawyers:

UK multinationals with significant overseas profits (particularly in the pharmaceuticals and other IP-rich business sectors) are recognising the importance of undertaking a cost-benefit analysis in relation to the migration of their tax residency; non-UK multinationals with UK intermediate holding companies may consider it prudent to do likewise.

Let’s be blunt: what they’re actually doing is promoting corporations leaving the UK for the financial benefit of their own firm. It’s wholly irresponsible. And self defeating: a London gutted of corporations is not going to be a lot of fun for corporate tax lawyers. But time and gain it is obvious that finance professionals do not think beyond the very short term.

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Are the CIOT / ICAEW really asking for the UK to copy Ireland?

18-Jul-08

The ICAEW and CIOT have jointly written to the Treasury asking that the current review on the future of UK corporation tax be expanded.

I have no problem with that. Indeed, it is obvious that the scope of the review is too narrow and that the range of participants is too limited.

But I do have a problem with what the ICAEW / CIOT have asked for. I am most worried by this:

We also hope that a wider consultation could consider potential incentives to encourage multinationals to conduct business in the UK. Other EU Member States have introduced incentives successfully - and seen economic benefits from them.

I have real concern that they’re referring to Ireland. If that is true then I am really worried because if that is so then this a disguised appeal for massive corporation tax cuts, and in the current financial climate this can only mean significant tax increases for ordinary people in this country.

Worse, it shows a remarkable lack of insight into Ireland’s situation: if we copy its policy of stealing profits from other countries by artificial inducement to relocate profit we rapidly move towards the corporation tax race to the bottom. Just read what Jim Stewart has to read about this abuse to see what the impact could be.

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Equitable Life: what it mean for offshore

17-Jul-08

The Parliamentary Ombudsman (Ann Abraham) has found that:

The U.K. should compensate Equitable Life Assurance Society policyholders who lost out when the insurer almost collapsed in 2000 because the government and regulators failed to properly supervise it for a decade.

It’s odd to note that in 2003 she found when reviewing exactly the same issue:

no evidence to suggest that the Financial Services Authority failed in its regulator responsibilities

I’ll ignore that for now; expectations of regulation change over time.

But let’s now put this in context: the regulatory failure of a on onshore contract has cost £4.5 billion.The government is likely to pay compensation as a result. Now assume that the contract in question had been relocated offshore in the intervening years, which is happening, as are whole pension funds. Sold in the UK, written elsewhere is now the deal people are being offered. And he fund will probably involve offshore investment to a much higher degree now than in the past, totally unregulated because no one has any real idea what is happening in those places and as such open to massive risk. Suppose it is then found that the offshore contract is at fault. Or that it is found in future (and, as I note, things change) that pension trustees were reckless to have invested in hedge funds and private equity registered offshore, but losses have resulted which the pension company cannot cover. Who picks up the bill then? The taxpayer does, as is now clear.

Now tell me offshore does not pose a threat to UK financial stability, or to the well bing of the UK taxpayer. Let me assure you, it does.

And can we do anything about it? Yes, of course we can. Try this:

1) We can say all pension investments made offshore (and offshore will include all the usual culprits from Jersey onwards) will be outside the regulatory regime because there is too little information to regulate investments and contacts made there.

2) We can say all pension funds have to tell their investors what proportion of their fund is unprotected, and why.

3) We can wait for investor reaction, and watch the money come back home.

The time has come to be tough on an industry that assumes that the public will pick up its risk whilst is executives walk away with the spoils of their own disregard for the collective good.

The time to start is now.

The people who could say it’s time to do that are the Treasury Select Committee. They have been deeply troubled by pension protection and offshore. It’s time they linked the issues and took action to protect the ordinary UK pension contributor and the ordinary UK taxpayer. Of course, they happen to be the same thing. It is clear offshore is conspiring against them both.

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UBS: their business model was illegal

17-Jul-08

This report is typical of many tonight:

UBS admitted it broke U.S. law in setting up sham offshore tax shelters for wealthy Americans and agreed to work with U.S. authorities in reviewing 19,000 accounts to identify clients who may have committed tax fraud.

“Our compliance system had failures, and misconduct appears to have occurred,” Mark Branson, chief financial officer of UBS’s global wealth management unit, told a Senate panel today. “It is apparent now that our controls and supervision were inadequate.”

Mr. Branson also said UBS will discontinue offering offshore banking and securities services to American clients through branches that aren’t licensed in the U.S. The firm allowed its Swiss bankers to market securities and banking services on U.S. soil without a proper license from 2000 to 2007, according to a report released today by the Senate Permanent Subcommittee on Investigations.

There is though a point I want to make: it is not apparent that UBS’s controls and supervision were inadequate. What is apparent is that their business model was illegal. And please don’t tell me they didn’t know it. It was their job to know it, so we can and must assume they did know or were criminally negligent if they did not. Either way, their business model was illegal.

And how do I know that what they did was deliberate? Well look at what Mr Branson says. He only says they’re stopping in the US. Nowhere else. Of course, promoting tax evasion is illegal just about anywhere (bar Switzerland and Liechtenstein), but UBS seems to be following the line that they’ll stop it when caught. I’d love to think I’m wrong, but it doesn’t look like it.

We now know UBS has acted illegally. The really troubling thing is we have absolutely no evidence at all they’ve stopped doing so.

And you can be sure of this: they’re not alone. This is the offshore world. And Switzerland is very definitely an offshore finance centre, whatever the IMF says.

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OFCs are out: bring back the term tax havens

17-Jul-08

The FT has reported that:

The distinction between “offshore” and “onshore” financial centres has been dropped by the International Monetary Fund, in a victory for more than 40 small countries that complained they had been unfairly stigmatised in the fight against financial crime.

The IMF said the distinction between on- and offshore centres “had been blurred by globalisation”, which had increased the range of cross-border transactions in many countries, as well as the launch of new financial centres catering to non-residents in countries such as Botswana, Brunei, Dubai and Uruguay.

The IMF said it still had concerns “in certain key areas” on combating money laundering and terrorist financing in OFCs, although it judged that compliance was “generally comparable” to that of non-OFC jurisdictions. It also reported progress on banking supervision, cross-border co-operation and data exchange.

Curious: you’ll note that in the third paragraph the IMF can’t get used to the fact that OFCs no longer exist, because it still refers to them. So do others noted in the report. In which case they clearly still do exist.

In fact, what this change represents is recognition of the fact that the 40 or so tax havens involved never were OFCs. The IMF has, I suggest, realised that all along they were tax havens, and no other word will do to describe them. This reflects the definition of tax havens and OFCs that I offer in TJN’s submission to the Treasury Select Committee where I say:

Tax havens are places that create legislation designed to assist persons - real or legal - to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions

and

Offshore financial centres are not the same as tax havens. OFCs are the commercial communities hosted by tax havens which exploit the structures that can be created using the tax haven’s legislation for the benefit of those resident elsewhere.

If it is still using the term OFC, and it looks like it is, then this is the context I suggest, and the move is welcome because it allows the shift in emphasis in regulation that we are calling for to happen. It’s true, the tax havens are now regulated, by and large. But the need now is for that regulation to be imposed on the OFCs. The IMF knows that is not happening. The IMF has cleared the decks for a change in terminology. That change will allow the attack on the abuse led by the accountants, lawyers and bankers of the world to begin in earnest.

It’s not a moment too soon.

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UK Treasury Select Committee must listen to the US Senate

17-Jul-08

The Senate Permanent sub-Committee on Investigations issued a press release yesterday saying (no link yet):

At a Thursday hearing entitled, Tax Haven Banks and U.S. Tax Compliance, the latest in a series of hearings with insider information about the workings of the offshore industry, the Senate Permanent Subcommittee on Investigations will examine how tax haven banks facilitate tax evasion by U.S. clients, hide client and bank misconduct behind the cloak of bank secrecy laws, and add to the offshore abuses that cost U.S. taxpayers an estimated $100 billion dollars each year.

A six month-long bipartisan Subcommittee investigation examined LGT Bank in Liechtenstein and UBS in Switzerland to expose how tax haven banks are assisting U.S. taxpayers to evade taxes, in particular by urging U.S. clients to open accounts in their offshore jurisdictions, assisting them in structuring those accounts to avoid disclosure to U.S. authorities, and providing financial services in ways that do not alert U.S. authorities to the existence of the foreign accounts. Subcommittee Chairman Sen. Carl Levin (D-Mich.) and Ranking Minority Member Norm Coleman (R-Minn.) will release a 115-page joint staff report detailing the findings of the investigation in conjunction with the hearing.

“Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” said Levin. “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States. Congress needs to enact strong penalties on tax haven banks that help U.S. taxpayers avoid paying taxes to Uncle Sam.”

Senator Coleman said, “It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars from taxation, forcing working families to shoulder the tax burden. By exploiting gaping loopholes, these foreign banks are enabling felony tax evasion. Simply put, foreign banks should not be Al Capone safe-houses for evading taxes. Closing these loopholes means we must strengthen reporting requirements, broaden the scope of the audit program, and extend the amount of time the IRS has to investigate cases involving an offshore tax haven.”

I have not a shadow of a doubt that the Senate has got this story right and really understands this issue.

Now contrast this with evidence submitted to the UK Treasury Select Committee by the massed ranks of tax havens and offshore finance centre operators (the UK included). Take this from the Financial Services Authority:

These reviews have tended to conclude that OFCs per se do not pose a threat to global financial stability, and that standards of regulation are generally comparable to those that apply in other jurisdictions.

How can they be that complacent when the US is not?

Then there is this from the Isle of Man:

The Isle of Man is committed to delivering effective regulation. It complies fully with international standards. Under the auspices of the Organisation for Economic Co-operation and Development (”OECD”), it is at the forefront of the development by small jurisdictions of a network of Tax Information Exchange Agreements (”TIEAs”), based on mutual economic benefit. It has a transparent tax code, and does not have banking secrecy laws. It has consistently shown itself to be a co-operative jurisdiction in terms of the international fight against criminal activity.

The Isle of Man may have the regulation, but it clearly does not work. Read the 400 plus page report of the Senate Subcommittee in August 2006. That recounts endless abuse within the Isle of Man: the regulation does not just not work,it is persistently ignored. Senator Carl Levin made it clear in his 2006 report that he thought this deliberate. This the recurring theme of the Tax Justice Network submission to the Treasury Select Committee.

The list could go on, and on. But the tone of them all can be summarised by Deloittes who say in their submission:

The UK should respond to these issues [raised by offshore financial centres] by supporting such international efforts [to regulate them], by improving its own competitiveness, and by continuing to take proportionate measures to protect its tax base.

The implication is clear, they think there is little wrong offshore: indeed they made that claim when giving oral evidence. The problem is, they say, with the UK where for ‘improved competitiveness’ read ‘reduced tax rates’. I mentioned yesterday a trend that I think is happening in the UK where the financial system is being captured by an elite for its own purposes. The combined submissions of that elite within the tax havens and financial services companies to the Treasury Select Committee, which in combination seek to whitewash the abuse that the US Senate clearly sees to be happening, is another example of this capture of the collective common good for the advance of the personal greed of these groups.

It is essential that the Treasury Select Committee see through the charade of their combined front and realise that this is the action of a group undertaking collective deception. If they don’t we continue our sleep walk into the nightmare scenario where the common good no longer exists, and democracy goes with it (for tax havens and offshore financial services operators share a combined contempt for the democratic process).

It’s extraordinarily worrying.

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CDC: Depressing, isn’t it?

16-Jul-08

I listened to the Radio Four programme on the Commonwealth Development Corporation (CDC) yesterday, and was depressed.

It’s depressing that CDC and its investment managers refused to take part.

It’s depressing that their shareholder, the Department for International Development did not require them to do so.

It’s depressing that someone has seriously misled the House of Commons when the Minister for International Development informed the House that CDC did not have copies of its subsidiaries accounts: an absurd impossibility as it could not have prepared its consolidated accounts if it did not have them.

It’s deeply depressing that CDC s now just another profit maximising short term investor.

It was depressing that Malcolm Bruce seemed to accept CDC’s blatant tax abuse.

Most important, it’s depressing that another part of the state has been captured by a small elite who are exploiting the public purse, the development agenda and the public good in pursuit of their own personal greed. This is typical of the capture of the state by this elite.

Two hundred years ago the English commons were enclosed by landlords, seizing the right to their use from the ordinary people of this country. It feels to me like the process is being repeated. A new elite is enclosing public property. State services are being captured to provide private gain (whether it be CDC or Virgin’s plans for health care). Our pensions are being captured for private gain. That’s how private equity and hedge fund managers make their absurd returns: they are stealing ordinary people’s future. Indeed, that’s how the City as a whole is paid.

I think this wholly unacceptable. I think people’s awareness of this is rising. I hope so.

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Give us inflation

16-Jul-08

Mervyn King has apparently admitted in the introduction to the Bank of England’s annual report that the Monetary Policy Committee

can have little impact on the path of inflation in the short term.

He’s guilty of one thing: he understates the sheer impossibility of the Bank having any control on inflation right now when the only weapon in their armoury is the interest rate.

The reality of current inflation is that it is cost push, but the cost is not wage driven, as is the experience of most who have been around long enough to remember what inflation is about, as I am. In that case using interest rates to try to diffuse the cost pressure is entirely pointless, unless the objective is serious recessionary pressure through the creation of significant unemployment and massive social disruption. A side product will be the destruction of the financial system on this occasion, rather like Thatcher destroyed the manufacturing base in her own misguided effort to destroy inflation more than tenet years ago.

Why? The logic is fairly simple. Our banks are failing. Bradford & Bingley cannot survive, even with a £400 million injection. That’s enough to cover a 1% right down in its mortgage loan book, and that is obviously insufficient to cover its risk. Alliance & Leicester has gone in acknowledgement that it cannot face that risk. And this trend will continue so long as interest rates in the UK stay at 5% base rate. That rate will mean many people have no hope of paying their increasing mortgage costs as low price deals are withdrawn and risk based interest rates increase way above the rates available only a year ago. This is no fault of those borrowers but it will lead to default, banking failure, rapidly falling house prices and disguised deflation. The latter, by the way is the simple reverse of the disguised inflation we’ve had for many years, which has been suppressed by ensuring house prices and housing costs stayed out of the RPI. The result is inevitable: it will be social turmoil, unemployment, the loss of many well known enterprises, the destruction of the some significant skill sets and further undermining of the core viability of the UK economy.

Now I agree that might at some time provide domestic compensation for external price pressure, but is that a price we are willing to pay for low inflation? I assure you, this is what will happen. It won’t yet: Mervyn King knows it hasn’t, which is why he says in the short term that inflation cannot be controlled. The pain, disruption and turmoil has to be imposed before that can happen. But is this a price worth paying to seek to stabilise an artificial measure of inflation? And is all this social disruption worth unleashing on our economy just to preserve the property rights of those with wealth? Because, make no mistake about it, the obsession with inflation is about preserving the property rights of those with monetary based assets.

Now, for one group of those with such rights I have real concern. They are pensioners. We’re going to have to accept increased responsibility for providing for them if inflation increases, and thankfully the pension credit system provides a mechanism for doing that. For the small minority of others in society who control most of our cash based assets I regret to say that I have much less concern. Put bluntly, preservation of their spending power is not worth the cost that will be imposed on everyone else. It’s a blunt choice we have to make, and an easy one to make. Inflation has to be allowed, interest rates have to fall and stability has to be returned to the housing and mortgage markets which underpin the wellbeing of millions more in this society whose well being will be shattered in the pursuit of stable money for a minority.

So, Gordon Brown has to end the absurd independence of th Bank of England to set monetary policy. He got away with this whilst growth let the economy manage itself. And the Bank pretended they were in charge whilst the upside managed things for them. But I’ll tell you (because I have managed companies in downside situations), it’s downturns that require real management skill, and real skill requires throwing away the rule book, relying on intuition and taking the action necessary, conventional or otherwise, that achieves results. In this case the result is an economy in which people can afford to live in homes, an economy with as full employment as possible, an economy where we have viable banks, and an economy where we can maintain our long term ability to function in the wider world. All of that is at threat right now because Gordon Brown said the Bank of England must control inflation using interest rates alone, and denied himself the right to interfere. Well, just repeal the legislation that gave that right away I say, get the Bank back under political control and get interest rates down to 2%. That way we have a chance. And given that the inflation is inevitable and quite beyond our control anyway, we’ll have to deal with that later. At least with low interest rates we’ll have the option to do so. With high rates we won’t have the chance.

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Ireland is at the heart of the credit crunch, and no one is saying so

15-Jul-08

Jim Stewart from Trinity, Dublin gave a fantastic paper at the TJN conference a week or so back showing that Dublin’s International Financial Services Centre is at the heart of the credit crunch but no one is saying so because it’s just a tax haven booking centre where nothing really happens.

Read the paper and appreciate the harm Ireland does, please.

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